PANAMA: WORLD CLASS TAX HAVEN
PART 3 of 9 - Excerpted from 'Tax Havens of the World' - by
Walter H. & D.B. Diamond.
Agricultural and Other Exemptions
In the agricultural sector, farmers with gross income under $100,000 are exempt from all income and real
estate taxes. Investments in agri business qualify for a 30% tax deduction but the funds must remain
invested for at least three years. Companies in the tourist industry that sign an agreement with the
Government receive a full exemption from income taxes for a period of 13 years. In addition, income
from investments in tourism or related activities and on the importation of materials, implements,
furniture, vehicles, boats and equipment required for tourism is granted an exemption of 20 years.
So-called "small enterprises" or "micro-businesses" (companies whose gross earnings are less than $200,000)
are exempt from the retained earnings tax and are taxed as a natural person on the first $100,000 and a
corporate body between $100,000 and $200,000. Headquarters companies rendering service to companies and
offices outside of Panama are exempt from income tax but pay the 1% business tax levied on declared
capital, with the maximum 20,000 balboas ($20,000). Air transport companies may opt to be taxed at 3% of
gross receipts of Panamanian source income or normal taxes.
All sales of urban real estate with the exception of newly-constructed buildings are subject to the 2%
tax on real estate transfers, including capital gains from real estate sales. Royalties, rents and
annuities paid to non-resident individuals or legal entities are subject to withholding taxes at the
normal individual or company rates. Capital gains from securities transactions are exempt from tax if
registered with the National Securities Commission and a minimum of 25% of the assets of the stock of
the selling company is located in Panama.
Panama does not impose any tax on income accumulations. Inheritance and gift taxes, which are applied
only on property located in Panama, range from 4% to 33.75%, with a 20% discount upon payment.
These taxes are not levied on securities of a Panamanian company having the bulk of its assets outside
Panama. There is not estate tax in Panama but all real estate transfers are subject to a 2% tax.
Bearer shares are subject to a 20% withholding rate. Royalties paid to non-residents by companies
operating in the Colon Free Zone are not subject to withholding tax. All imports outside the Colon Free
Zone are subject to a 7% surtax of their Freight On Board value in addition to the normal import duties.
In addition to the value-added tax of 10% on alcoholic drinks, 6% for syrups, mixtures and extract
compounds, and up to 0.05 bolivar per liter for alcoholic drinks.
Retired Individuals Program
The "Retire to Panama - and Live" program inaugurated in 1970 with the issuance of Cabinet Decree
No. 260 and Executive Decree No. 146, allows indefinite residence in Panamanian territory to retired and
pensioned individuals who are at least 45 years old or cannot work because of a physical disability.
Applicants for a tourist-pensionee-visa must prove to the Panama Government Tourist Institution (PAT)
that they have a permanent income of 400 balboas ($400) monthly plus 75 balboas ($75) for each dependent
family member. They must certify annually to PAT that their income has remained the same or increased;
in case of a decrease, the visa may be cancelled. Another requirement is a medical certificate from a
local doctor stating that the applicant is not suffering from mental or contagious diseases. Visas are
issued without payment of deposits, levies or migration fees. Individuals who obtain visas are entitled
to the following benefits: (1) duty-free importation of household and personal goods up to a value of
$5,000; (2) duty-free importation once a year of a motor vehicle, including a mobile house or trailer;
and (3) exemption from inheritance and donation taxes. Executives of multinational companies receiving
a minimum of $1,000 monthly are eligible for a $3,000 import duty exemption on household goods and for
visa procurement fees. Visa holders are ineligible for employment unless they work for the Government
or obtain authorization to enter private enterprise from the Ministry of Labor and Social Welfare.
Investment in Panama is permitted. Whereas in Costa Rica pensionades are exempt from income taxes,
in Panama they are liable to taxes amounting to 7,5% on the minimum required income of 4,8000 balboas
($4,888) and rising to 56% over 200,000 balboas ($200,000).
Reinsurance Law
Reinsurance business had been attracted to Panama by the Reinsurance (Companies) Law No. 72 of 1976.
Between 1976 and 1981 the total amount of business underwritten grew five-fold from $20 million to
$100 million. Prior to the 1988 unrest, 36 companies were registered in Panama handling offshore
insurance and another 26 were issuing reinsurance through the Latin American Reinsurance Syndicate.
The National Reinsurance Committee grants reinsurance and brokerage licenses to companies with a minimum
capital of 250,000 balboas ($250,000) that satisfy certain solvency requirements. Following adoption of
the unitary tax law by the States of Florida in which multinational corporations are taxed on a proportion
of their worldwide operations, a number of companies previously had transferred their Latin American
headquarters to Panama.
Captive Insurance
However, it was not until 1996 that the National Assembly passed a law permitting formation of
Panamanian captive insurance companies that are exempt from tax on their premiums and profits.
They are forbidden to handle domestic risks. Captives are required to maintain a headquarters office
in Panama, appoint a local representative, obtain a license from the Panama Superintendency of Insurance,
and register with the Superintendency. Licenses are issued for two types of risks:
Long-term, including life insurance, pensions, annuities, and hospitalization; companies need to have
$250,000 minimum capital and a 6% solvency margin; and
General, all types of insurance not covered in long-term; companies need to have $150,000 minimum
capital and a ratio no higher than five to one between net retained premiums and net assets at the
close of the fiscal year.
An unusual provision calls for licensees to make a compulsory investment in Panama of 35% of the
reserves of their branches and subsidiaries. In addition, companies pay an annual Government fee similar
to the levies plus an annual $2,000 fee to the Superintendency for certification, program reviews, and
financial analysis services. Audited financial statements and an annual report on insured and reinsured
risks must be filed with the Superintendency four months after the end of the fiscal year. Under the 1996
Captive Insurance Company legislation, a payment of 1,000,000 balboas ($1,000,000) must accompany an
application to establish an insurance or reinsurance branch or company. The minimum reserve of 35% may
be in State or National bonds, certain income-producing real estate, guaranteed loans by the State or
time deposits and savings accounts. A bond in favor of the National Treasury must also be established in
the amount of 100,000 balboas ($100,000) for negligence and fraudulent acts.
Triangular Hedge
Panama also is becoming a center for counter trade or barter transactions as a result of its approved
concept of practicing the so-called "triangular hedge." This is the acceptance of a local currency
commodity-dollar as a payment for exchange of goods in international commerce. Under the "triangular hedge"
mechanism long-term commodity contracts are negotiated on futures exchanges so that prices may be locked
in for long periods. It is particularly beneficial to foreign traders dealing in such staple commodities
as copper, petroleum and sugar as well as certain metals and agricultural products.
Panama also had been used by foreign investors for captive leasing companies, to own and license
patents, trademarks and copyrights, and to promote and handle sales in third countries of goods produced
by the parent company or its subsidiaries (which are owned by an offshore holding company).
